According to a few reports I read this week we should all be thankful to the European Commission for clearing up the "loophole" that existed in the current Systematic Internaliser regime. Well that's a relief – except for two small points – first they haven't
and second they seem to have missed the whole point. A commission official has clarified that SIs will not be allowed to "regularly" engage in "pre-arranged matching of trades via de facto riskless back-to-back transactions". So what does "regularly" mean?
Once a second, a day, a month? Presumably this will be interpreted differently according to the velocity of a stock and/or its underlying liquidity. And, bear in mind, the SI regime stretches over OTC derivatives transactions too which are even broader in
their trading scope – so, no chance for confusion there then. Also, what is their definition of "riskless"? Holding risk depends upon the likelihood of prices moving against you, which again varies hugely between different stocks and instrument types. So the
only way I could absolutely prove that I was really taking on risk would be to hold onto a position (even if I had the other side) until the price did indeed move against me. Again, hardly a satisfactory outcome for anybody.
It would be great if ESMA understood that simply declaring lit good and dark bad is just too much of an oversimplification and that market forces are just that – the forces that shape and dictate how markets operate. But don't worry, the European Parliament
has got another 3 months to scrutinise the issue. Can't wait...